Home Prices Still Rising at a Torrid Pace

Key gauge surges 12.2% from a year earlier the largest gain since March 2006.

Home prices shot up in Americas largest cities in May, rising at a pace not seen since the bubble days, according to a closely watched gauge. The Standard & Poors Case-Shiller index of 20 large U.S. cities released Tuesday, rose 2.4% from April and 12.2% from May 2012- the largest year-over-year gain since March 2006.

Average home prices across the 20 cities have now reached their spring 2004 level. For the first time, two cities- Denver & Dallas surpassed the peaks they reached before the 2008 financial crisis. All cities tracked by the index saw prices rise from a year earlier and the previous month.

“The long-awaited housing recovery is in full swing,” Senior Economist Erik Johnson of IHS Global Insight wrote in an emailed analysis. “We expect housing to remain a key driver of growth for at least the next couple of years.”

Low mortgage rates, a shortage of homes for sale and heavy investor demand have sent home prices sharply higher this year, providing an economic lift but also sparking concerns that some markets are overheating.

Las Vegas and Phoenix, two cities where prices fell hard during the bust, have come roaring back, in large part because investors have scooped up many foreclosed properties to flip or rent out. Year-over-year prices rose 23.3% in Las Vegas and 20.6% in Phoenix. Those gains were surpassed only by the San Francisco market, a tech mecca where prices skyrocketed 24.5% from May 2012. Southern California price increases maintained their breakneck pace in May. Prices rose 19.2% in the Los Angeles region over the year and 17.3% in the San Diego area.

“The market is on fire right now,” said Max Nelson, a senior partner at Deasy/Penner & Partners Beverly Hills office. Nelson said his company has already received multiple offers for a Pacific Palisades home it placed on the market Friday for $1.65 million— before even holding an open house. Those gains are rapidly eating away at affordability, further hampering the efforts of first-time home buyers who often must compete with all cash investor offers in many markets. Stuart Gabriel, director of UCLAs Ziman Center for Real Estate, said the recovery is pricing out some home buyers— a disconcerting trend.

“The rebound has been striking,” he said.

The median home price in the six-county Southland rose 28% in June to $385,000, a record year-over-year gain, according to research firm DataQuick. The median is the point at which half the homes soold for more and half sold for less, so it reflects the mix of homes selling as well as rising values.